Giving Qualcomm Less Rope

Qualcomm (Nasdaq: QCOM) is doing all it can to support its stock price—but the second half still depends on getting margins higher.

On March 1, the company’s board of directors voted to increase the company’s quarterly dividend by 12% to 19 cents a share from the previous 17 cents a share. The new 76 cents per share annual rate is equal to a 2.03% yield on the noon price on March 2. (The increase is effective for dividends paid after March 28.)

The board also authorized a new, $3 billion share buyback program. This replaces the company’s recently expired $2 billion program. (As is typical of most share buyback programs, this one wound up buying back fewer shares—about $1.7 billion—than authorized.)

The stock has popped today on the news—up about 5% as of noon—since companies typically use dividend increases to signal their confidence in the company’s future. In this case, I think investors are thinking that the company is saying that it believes that its call for a second half 2010 increase in average selling prices—which would bring higher margins—is accurate.

After Qualcomm badly missed Wall Street earnings estimates for its fiscal first quarter of 2010, and on January 27, told Wall Street to lower its expectations for the second quarter, I’ve got a definite “show me” attitude on this company. If management was so surprised a month ago, why should I decide that they can accurately predict the second half of the year on March 1?

The key issues are going to be average selling price and profit margins. In other words, not how many chips the company sells or how many units sold by other companies it collects royalties on, but what the selling prices and profit margins are on those sales. Qualcomm has said that it expects 15%-23% unit growth in calendar year 2010 and that the average selling price will climb in the second half of the year. If that increase in selling price doesn’t materialize, or if it is smaller than the company now projects, Qualcomm will deliver another negative surprise when, after announcing fiscal second quarter earnings on April 27, it tells Wall Street what to expect for the third quarter and the rest of the fiscal 2010 year.

As of March 2, I’m going to act on that skepticism about the company’s optimism—and about the second half of 2010 in general (see this recent post)—by giving the company less chronological rope. As of March 2, I’m cutting my target price to $44 from $52 and my time schedule to May from December 2010.